Millennials are the largest demographic cohort in the nation, U.S Census Bureau data shows. And up to 80 percent are already saving in their employer-sponsored retirement plans, according to a 2015 report from Bank of America Merrill Lynch.
The newest generation of workers—which the Pew Research Center defines as those born between 1981 and 1997—has exhibited distinctive attitudes and behaviors that plan sponsors and their advisors must consider when designing menus. Plan administrators, too, must rethink some long-held beliefs about participant behavior.
For starters, millennials tend to be more risk averse and gravitate toward conservative investments that they believe will be less exposed to bouts of volatility. Millennials also tend to be highly educated and research-oriented. Given these inclinations, plan sponsors should consider providing education about the benefits of long-run investing, since they have just begun their accumulation phase.
The number of millennial plan participants is likely to rise, particularly if the U.S. economy—and the job market— continue their slow but steady recoveries.
Employers with growing millennial populations should adjust their lineups to accommodate this generation’s more conservative sensibilities. Current research—including a study published by the retirement and trust unit of Wells Fargo—suggests that millennials may be inclined to choose managed options with customizable and adjustable glidepaths. Forward-thinking sponsors would do well to get ahead of the curve by looking widely across all age groups within their plans, making sure all cohorts have access to these types of solutions.
Plans geared toward millennials can offer a menu that includes conservative balanced funds, a mix of core funds and, for an added measure of diversification, funds in non-core asset classes, such as emerging markets and small-cap equities. The mix can also include a risk-managed option to help young investors build up their balances and gain experience with markets until they feel comfortable assuming greater risk levels.
About a third of millennials say that they find socially responsible investing “very appealing,” and another 59 percent say it’s “somewhat appealing,” according to a June 2016 survey by Legg Mason and Naissance. Options that include some socially responsible element stand a good chance of aligning with millennials’ social and environmental learnings.
Communication and Education
A targeted communications effort can help satisfy millennials’ appetite for understanding the different possibilities available for a given financial transaction. These materials should explain the types of investment choices available through the plan. For instance, plan sponsors can teach millennials about Roth 401(k) options, which allow them to contribute to their plans on an after-tax basis, so they don’t have to pay taxes when they cash out. That can help save total taxes, since millennials are typically in a lower tax bracket when they make initial contributions than when they are ready to pull assets from these accounts.
As millennials enter the workforce and age through it, plan sponsors and their financial advisors will need to adapt their retirement plans to suit this growing cohort. A well-considered and robust investment lineup, supported by strong communications, can help plan sponsors provide an appealing, competitive retirement plan that retains younger workers and helps them invest their way toward a more secure retirement.
This is an excerpt of Macquarie Investment Management’s article Millennial Workers Require Special Plan Sponsor Menu Design.